The Failure of Privatization in Iran

The Failure of Privatization in Iran
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Privatization is one of the critical components of sustainable economic progress and development. Although a large number of countries have initiated privatization, in general, success stories regarding the issue are lacking. In Iran, the privatization process began during the presidency of Akbar Hashemi Rafsanjani and was carried out during different periods in various categories. This process faced a serious legal challenge in the early years due to Article 44 of the Iranian Constitution, and the government was unable to privatize many industrial and manufacturing companies and factories. According to Article 44, all major industries such as foreign trade, large mines, banking, insurance, electricity, large dams, water supply networks, radio and television, post, telegraph, telephone, aviation, shipping, and railways were defined as public property. Hence, they had been administered by the government on behalf of the public. This legal restriction was lifted in 2005. 

Since 2005, privatization moves in Iran, which have many administrative and fundamental deficiencies, have acted against their original purpose and nature for various reasons. During this time, many privatized factories experienced management and production crises which ultimately led to the bankruptcy and liquidation of some of these factories. Most of them have faced issues such as workforce adjustment, layoffs, delayed wage payments, declining production, bankruptcy, the dissolution of the factory, and its re-transfer to the government. According to statistics, unsuccessful privatization moves in Iran have resulted in the unemployment of nearly 50,000 workers in the country so far. Also, according to the latest statistics of the Iranian Privatization Organization, among the 189 companies that have been transferred to the private sector, 104 are "unprofitable" and only 24 are in "good" condition. For instance, the Marvdasht Azmayesh Factory, which was once a famous brand with its products such as air conditioners, refrigerators, and fans, faced a sharp decline in production due to various problems and reduced its workforce from 1,400 to 160 people. Eventually, the factory was closed completely and turned into an onion warehouse. In a similar case, after its privatization, the Polyacryl Esfahan Factory closed four of its six factories, stopped some of its production lines and most of its workers lost their jobs. People who did not lose their jobs, on the other hand, had faced a delay in the payment of wages. Polyacrylic Esfahan Factory, however, was one of the largest companies in the 1990s, and its workers were relatively well off at the time. Calcimine Company is another factory whose production volume fell by 80% after privatization. Calcimine had about 1,200 workers before it was transferred to the private sector, and after the transfer, the number was reduced to 300. Another factory that went bankrupt after being transferred to the private sector and ceased production is the Hamedan Keyvan Factory, which operated in the food sector. After more than four decades of operation, the factory completely stopped production following privatization. Another example is Machine Sazi Tabriz Company (Tabriz Machinery Manufacturing Co.) in East Azerbaijan Province. The company, which was the largest tractor manufacturer in Iran with domestic and foreign branches, practically ceased production after privatization, and its workers were not paid for 18 months.  

In addition to the examples mentioned above, after their transfer to the private sector, dozens of other manufacturing and industrial companies have experienced bankruptcy, staff adjustments, layoffs, delay in payments to workers, debts to banks, and decline in production (see Table). 

Studies on the inefficiency of privatization in Iran until 2020 also show that during the 15 years of implementing this policy, only 16% of the total volume of transfers of state-private or semi-state companies was to the real private sector, and the remaining 84% to the government (via Justice Shares). It indicates a clear sign of the failure of the privatization process in this country

It is worth noting that the ownership of a number of large companies that were transferred to the private sector returned back to the government after failed experiences. The Haft Tappeh Sugarcane Company in Khuzestan Province represents an example of the situation. Haft Tappeh Sugarcane Company has been downsizing and reduced production after it was transferred to an inexperienced entrepreneur. The factory's production decreased from 55,000 tons to 18,000 tons, and its managers were arrested for corruption and non-payment of workers' wages. However, following the protests and a strike by employees of this company, the ownership of the company was returned to the government in 2021 by a court decision.

The inefficiency of privatization in Iran has been affected by different factors. Due to a lack of regulations and transparency, the privatization experience in Iran has not been successful. A substantial amount of rent under the possession of these public companies attracted opportunist individuals and institutions. According to many local Iranian economists, most privatizations in Iran are driven by rents, which has led to transfers only to their own groups, especially in companies and industries with high turnover. In fact, instead of a real private sector, privatization has been carried out from state-owned companies to semi-state companies. The new owners of these enterprises are often individuals and groups affiliated with government agencies, Bonyads (foundations), and Astans (such as Astan Quds Razavi). For example, the transfer of the Telecommunication Company of Iran to the Mobin Trust Development Consortium affiliated with the EIKO1  and the IRGC2  Cooperative Foundation is an example of a transfer to semi-state companies. 

In addition, widespread corruption, a poor business environment, macroeconomic instability, and ineffective property rights are four other major factors in the failure of privatization in Iran. Corruption is one of the most important factors that has reduced the motivation of the real private sector to enter productive economic activities in the country. Transparency International surveys of the CPI3  in 2021 show that Iran ranks 150th out of 180 countries in this index. This means that the corruption situation in Iran is critical, and the country is drowning in corruption at various levels. The imprisonment of Akbar Tabari, the former deputy head of Iran's judiciary during Sadeq Larijani's term, due to corruption is proof of this claim. 

In addition, the existence of significant fluctuations in macroeconomic indicators, such as rising inflation, exchange rate fluctuations, changes in laws and regulations, the lack of an unfavorable business environment, and inefficient property rights are other factors in the failure of privatization in Iran. 

As a result, it is obvious that privatization, which was supposed to reduce the government's financial burden, has practically become a tragedy in Iran. Therefore, it can be claimed that if this process continues after the failed experience of privatizing dozens of companies to the private sector, Iran's industry, which is also significantly affected by the US sanctions, will be practically paralyzed. Also, the unsuccessful continuation of privatization will lead to unemployment among a wide range of professional workers in Iran, which will ultimately have adverse socio-economic consequences for the country, especially for the families of workers. 

  Execution Headquarters of Imam Khomeini’s Order - EIKO
  Islamic Revolutionary Guard Corps - IRGC
  Corruption Perceptions Index – CPI